Edited version of private ruling

Authorisation Number: 1011686045573

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Ruling

Subject: Fuel tax credits - dredge and electricity generation

Question 1

Is the use of diesel fuel in powering the two main generators on board the vessel a fully eligible activity when claiming fuel tax credits?

Answer

Yes.

Question 2

Is the use of diesel fuel in powering the auxiliary generator-set on board the vessel a fully eligible activity when claiming fuel tax credits?

Answer

Yes.

Question 3

Is the use of diesel fuel in powering the emergency generator-set on board the vessel a fully eligible activity when claiming fuel tax credits?

Answer

Yes.

Period the ruling applies to:

2009-10 income year

2010-11 income year

2011-12 income year

Commencement date of scheme:

1 July 2009

Relevant facts and circumstances

You undertake dredging operations.

The dredging operations were undertaken during the 2010 -11 income year.

During the dredging campaign, you will utilise a vessel to conduct the dredging operations. The vessel is a trailing suction hopper dredge which consumes large quantities of diesel fuel when operating.

The vessel is powered by the following machinery:

§ two main engines each directly coupled to a generator, each of these engines also provides the vessel propulsion through drive to the variable pitch propellers under sailing conditions.

§ one auxiliary diesel generator; and

§ one emergency Generator Set.

The electricity generated from all four of these generators is fed into the vessel's main electricity grid via a main switchboard.

The electricity grid then provides power to all equipment operating on-board the vessel (other than the variable pitch propellers which operate from the main engines), including the following electrically powered equipment:

§ two x dredge pumps;

§ two x jet pumps;

§ two x bow thrusters;

§ various winches, gantry operations and cranes;

§ all vessel control and navigation equipment (that is, on vessel's bridge)

§ all air-conditioning units and exhaust fans; and

§ all lighting and residential power required to generate electricity for domestic requirements of the crew.

Operational Processes of the vessel

§ The mechanical processes utilised during the operation of the vessel are clearly designed to enable the vessel operators to directly manipulate and direct the quantum of electrical power produced by the generators.

§ Fuel is used for the purposes of generating electricity to power electrical equipment on board the vessel and for use in an internal combustion engine for the purpose of propelling the vessel.

§ Electrical power is required to operate the vessel at all times, even when stationary, as demonstrated by the levels of power examples below.

When the vessel is stationary alongside a wharf or at anchor

§ The auxiliary diesel generator operates to provide all necessary electric power to equipment on board the vessel whilst it is stationary. Generally this is to meet the electricity requirements of the vessel services and crew accommodation and amenities.

§ The main engines do not operate at this time, therefore no vessel propulsion occurs.

When the vessel is stationary during dredging discharge operations

§ The main engines are continuously operating to provide drive to the main generators which provide power to the various electric pumps (main dredge pumps, jet pumps etcetera) and other electrical equipment to pump material from the vessel.

§ The propellers are placed on zero pitch, thereby drawing absolute minimal power.

During free sailing

§ The main engines operate continuously to provide drive to the main generators which provide ship wide electricity for general vessel services, crew accommodation and amenities; and provide drive to the variable pitch propellers to sail the vessel.

During manoeuvring

§ The main engines operate continuously to provide drive to the main generators which provide ship wide electricity for general vessel services, crew accommodation and amenities; and provide drive to the variable pitch propellers to sail the vessel.

§ During manoeuvring, there is an increased requirement to provide electrical power to operate the vessel's bow thruster motor.

During dredging operations (whilst moving)

§ The main engines operate continuously to provide drive to the main generators which provide ship wide electricity, the majority of which is consumed by the vessel's main electric dredge pumps and jet water pumps; and provide drive to the variable pitch propellers to sail the vessel.

You submit that the variable pitch propellers can be progressively set to zero pitch whilst the engines are running to power the generators when the vessel is stationary or performing dredging discharge operations. You state that this indicates that the functions of propulsion and electricity generation are distinct and separate activities.

Therefore, you state that any fuel used to drive the propellers of the vessel is not considered to be for the purposes of electricity generation and as such you will not be entitled to claim fuel tax credits at the full rate for this portion.

You submit that a reasonable method of apportionment will be required to distinguish between the fully eligible fuel used by the engines to generate electricity and the partially eligible fuel used by the engines to drive the propellers of the vessel. However, you do not seek a ruling on apportionment.

You advise that the emergency generator is only operated on occasions where there is a failure in the main and/or auxiliary generators, and also to provide emergency power to the vessel's fire fighting water pumps.

You have stated that you are seeking an opinion on whether the use of fuel is a fully eligible activity. You are not seeking comments on other elements which must be necessary to claim a fuel tax credit, such as acquisition.

Relevant legislative provisions

Fuel Tax Act 2006 section 41-5

Fuel Tax (Consequential and Transitional) Provisions Act 2006 Division 2 of Schedule 3

Fuel Tax (Consequential and Transitional) Provisions Act 2006 subparagraph 11(1)(b)(iii) of Schedule 3

Reasons for decision

Section 41-5 of the Fuel Tax Act 2006 (FTA) provides that you are entitled to a fuel tax credit for taxable fuel that you acquire in Australia to the extent that you do so for use in carrying on your enterprise if you are registered for GST. However, this entitlement is affected by Division 2 of Part 3 in Schedule 3 to the Fuel Tax (Consequential and Transitional) Provisions Act 2006 (FTCTPA) which operates to restrict this entitlement to specific activities for fuel purchased between 1 July 2008 and 30 June 2012, whilst retaining entitlements under the Energy Grants (Credits) Scheme Act 2003 (EGCSA).

Subparagraph 11(1)(b)(iii) of Schedule 3 to the FTCTPA provides that an entitlement to a fuel tax credit arises under section 41-5 of the FTA if you acquire taxable fuel for a use by you in generating electricity.

Fuel is used for the purpose of generating electricity where the electricity is an end in itself and can in turn be used for any purpose for which electricity is required.

This includes fuel used in generating electricity when it is used in a generator to provide power to a business premises [or vessel] and/or a range of equipment.

The vessel is powered by two main engines, each directly coupled to a generator. It is also powered by one auxiliary generator and one emergency generator set.

The electricity generated from all four generators is fed into the vessel's main electricity grid via a main switchboard. This electricity grid then provides power to all equipment operating on-board the vessel including dredge pumps, jet pumps, bow thrusters, various winches, all vessel control and navigation equipment, etcetera.

Main generators

All power generated by the two main generators is fed directly into the main electrical grid of the vessel via the main switchboard. This electricity is then distributed as needed to power all of the electrically driven equipment on board the vessel.

All equipment on board the vessel, other than the propellers which are variably driven by the engine, is powered by the two main generators.

The variable pitch propellers can be progressively set to zero pitch whilst the engines are running to power the generators when the vessel is stationary or performing dredging discharge operations. You state that this indicates that the functions of propulsion and electricity generation are distinct and separate activities.

You submit that a reasonable method of apportionment will be required to distinguish between the eligible fuel used by the engines to generate electricity and the ineligible fuel used by the engines to drive the propellers of the vessel.

You use diesel fuel to power the two main engines, which are each directly coupled to generators for the generation of electricity on board the vessel. This meets the requirement that the fuel is for the purposes of electricity generation within subparagraph 11(1)(b)(iii) of Schedule 3 to the FTCTPA.

Accordingly, the use of diesel fuel in powering the two main generators on board the vessel is a fully eligible activity when claiming fuel tax credits.

Auxiliary generator

Unlike the main generator, the auxiliary generator does not provide any direct drive propulsion to the vessel.

All power generated by the auxiliary generator is fed directly into the main electrical grid of the vessel via the main switchboard. This electricity is then distributed as needed to power all of the electrically driven equipment on board the vessel.

As the auxiliary generator does not contribute in any way to the propulsion of the vessel, all fuel consumed is used solely for the purpose of powering the auxiliary generator. As such, all fuel consumed by the auxiliary generator is used in the activity of electricity generation within subparagraph 11(1)(b)(iii) of Schedule 3 to the FTCTPA.

Accordingly, the use of diesel fuel in powering the auxiliary generator-set on board the vessel is a fully eligible activity when claiming fuel tax credits.

Emergency generator

When required, the vessel is also powered by an emergency generator set. This generator-set does not provide any direct drive propulsion to the vessel.

The emergency generator is only operated on occasions where there is a failure in the main and/or auxiliary generators, and also to provide emergency power to the vessel's fire fighting water pumps. It is used solely for the purpose of providing electricity to the vessel and does not provide any direct drive propulsion to the vessel.

As the emergency generator does not contribute to the propulsion of the vessel, all fuel consumed by the engine is used solely for the purpose of powering the emergency generator. All fuel consumed by the emergency generator is used in the activity of electricity generation within subparagraph 11(1)(b)(iii) of Schedule 3 to the FTCTPA.

Accordingly, the use of diesel fuel in powering the emergency generator-set on board the vessel is a fully eligible activity when claiming fuel tax credits.